Mercedes-Benz Group AG

XETRA:MBG

Earnings Call Transcript 2022-Q4

[Operator]

Welcome to the global conference call of Mercedes-Benz. At our customers' request, this conference will be recorded. The replay of the conference call will also be available as an on-demand audio webcast in the Investor Relations section of the Mercedes-Benz website. The short introduction will be directly followed by a Q&A session. [Operator Instructions] I would like to remind you that this telephone conference is governed by the safe harbor wording that you find in our published results documents.

Please note that our presentations contain forward-looking statements that reflect management's current views with respect to future events. Such statements are subject to many risks and uncertainties. If the assumptions underlying any of these statements prove incorrect, then actual results may be materially different from those expressed or implied by such statements.

Forward-looking statements speak only to the date on which they are made. May I now hand over to Steffen Hoffmann, Head of Mercedes-Benz Investor Relations and Treasury. Thank you very much.

[Steffen Hoffmann, Head of Investor Relations and Treasury]

Thank you. Good morning. Once again, good morning, ladies and gentlemen. This is Steffen Hoffmann speaking. On behalf of Mercedes-Benz.

I'd like to welcome everybody here in the room as well as on the phone and the Internet to our full year results conference call.

We are very happy to have with us today Ola Kallenius, our CEO; Harald Wilhelm, our CFO. You probably all joined presentation right before. So just as a quick reminder, the respective capital market presentation with all '22 figures and the '23 outlook can be found on our IR website.

Ladies and gentlemen, you may ask your questions now. For the people in the room, please raise your hand to show you would like to ask a question. And after being prompted, please use the microphone ahead of you. Please press the button before you ask a question, and please press it again after the question to mute it.

For the ones who joined by phone, the operator will explain the procedure in a moment. As always, we'd like to ask you to identify yourself with the name and the name of the organization. Please ask your question in English. Please limit the amount of questions to 2.

Now before we start, the operator will once again explain the procedure for the ones on the phone.

[Operator]

[Operator Instructions]

[Steffen Hoffmann, Head of Investor Relations and Treasury]

And the first question goes to Tim Rokossa from Deutsche Bank.

[Tim Rokossa, Deutsche Bank]

First of all, great to see the share buyback program from you guys. As you know, we've been discussing about this for a long time already. So this is great to see.

I have two questions. The first 1 relates to the mix and the second 1 to pricing and volume, and all 3 up which are somewhat interlinked. TVs are expected to outperform unit sales once again. Ola, you already said that semis are still a bit of a constraint, but it's easing. Do you feel any pressure internally to dilute the mix any time soon?

Or can TVs continue to grow until MMA is being introduced, for example? And by the way, I would not consider a Baby G wagon that we could read about in the press and mix dilution. My wife's a big fan. So the Rokossa household will clearly be a buyer of that.

And secondly, when we think about push volume versus positive pricing, it's great to see that you don't have any real aggressive volume assumptions. I think we can see this as a confidence sign that you don't push volume. But obviously, a lot of people would challenge you on your positive pricing assumption. How do you ensure pricing remains positive? Is that because you still have this backlog in Europe that you work through where there's a lot of price increases still included?

Is the direct sales model pushing into that? Or how do we really get confidence that positive pricing is still a thing also in 2023?

[Ola Kallenius, Chief Executive Officer]

So if we start with the first question, thank you, Tim, for that. Yes, we're guiding overall volume at the same level -- around the same level as 2022, but we have an ambition to slightly grow on the top end side.

But I think 1 thing that shall not be forgotten, if you look at how the progression of this has been over the last 2 to 3 years, that within the 3 segments that we have; Top-End, Core and Entry. You can have quality growth inside those segments. So indeed, you made reference to the Entry side. Do we feel pressure? We have been able to improve the quality of the contribution on the entry side as well.

Some of the vehicles that we do sell there have very healthy contribution margins. So you cannot -- it's not a black or white. You just do the one and you don't look at the other. You have to manage this whole pyramid, or as we presented last year when we talked about our luxury strategy, this diamond and look inside of it.

And so with regard to pricing. Of course, some of it is action that you have taken last year that then go into a full year effect. And it is indeed our ambition this year too in the net between pricing and what we have going on, on the raw mat and the commodity side, to keep that in positive territory. And I don't comment to speculation on our portfolio. There are so many fans thinking about so many different variants.

So you have to stay tuned on that one.

[Operator]

Next one is Patrick Hummel from UBS.

[Patrick Hummel, UBS]

Also 2 questions from my end. The first is just a follow-up actually to Tim's question about pricing. And I would assume there are 2 very price-sensitive segments that you're still exposed to. Compact in Europe, also the fleet segment, where you have a mix of, let's say, Entry and Core luxury cars, where I would assume that it's a fine line to walk between pricing and volume management.

So I'm wondering, as your volume guidance for the group implies flat and you said Top-End, you want to grow, so you're obviously prepared to take a certain hit or a small hit on the volumes at the bottom end of your portfolio, how do you steer your distribution in that regard? Where are the pain points in terms of losing volumes where you would say, okay, we have to do a bit more on pricing? What are the incentives? Can you talk a little bit more about the daily art of optimizing, as you called it just before?

And my second question relates to China. There, we see a very competitive market environment, especially in what is your Entry and then Core segment. We've seen a lot of price action on the EV front. And I'm just wondering what that elevated level of competition in the EVs that will probably affect you at least at the bottom end of your portfolio, what that means for your trajectory towards EV margin parity. If you can just give us an update on that?

[Ola Kallenius, Chief Executive Officer]

You start with the first one, maybe I'll begin on the second.

[Harald Wilhelm, Chief Financial Officer]

A bit of a further deep dive into pricing, but maybe not quantifying each and every lever on the pricing. I think we have been talking quite often about, I mean, what's behind pricing? I mean it's definitely -- it's, I mean, the initial pricing of the vehicle, I mean, which should stay over the life cycle. It is the escalation updates year-over-year. It is how we manage the discounts.

And now very important, I mean, the lever coming from the direct sales model.

So we work on all of these. So we took, I think, I mean, an ambitious approach in terms of the initial pricing for basically, I think, all of the variants, which came, I mean, into the market, and we'll continue to do so. However, we need to stay at the holistic as well and watch, I mean, the competitive space in the environment. Second one is on the year-on-year price, I mean, escalation. You know we reacted, I think, very quickly and swiftly back in 2020, 2021 to step up, I mean, beyond the ordinary course in terms of, I mean, the inflation update, the escalation update.

And we took measures for 2023 already for this to be, I mean, the case in 2023. Discounts, I mean, you could see it in the chart basically on -- in the walk -- in the EBIT walk '21 to '22, had a very important impact, I mean, in the price bucket.

We got it really, I think, to a nice level. I mean, here, we need to adopt a bit, I would say, to market environment. But then the switchover of the direct sales model should be a good enabler in terms of managing discounts moving forward. The markets which we turned around so far, I think, really proved very beneficial in this respect.

And when -- beyond the expectation we had when initially setting out the business case for the switch over of the direct sales model. So the entirety of all of these measures allows us to say that the pricing should be positive and even so positive that it can offset the headwinds, which we expect, I mean, from raw mat commodity supplier inflation, la, la, la, la, la. Will it be as high as 2022? I.e. the walk from '22 to '23.

Probably not, but should be, I mean, good and solid enough, I mean, to compensate.

[Ola Kallenius, Chief Executive Officer]

And if you think about the tools, you asked about the tools. If you're out there in the market, how do you actually drive the market. And it's a joint venture between the marketing and salespeople and Harald's team on the finance side.

It's essentially a focus on contribution margin and also contribution margin per vehicle. So to manage the overall contribution, that is KPI #1. If we talk about China, it is absolutely true that over the last few years, the growth of the electric vehicle market in China has been from the bottom.

So most of the action has been below RMB 300,000, segments where we almost don't have anything. So it's like the EV market has been below where premium and upper premium and luxury sits. And one has to admit that the competitive intensity in that segment of the market is very, very, very high, which is, of course, something that we're watching, whereas the premium and upper luxury is still in very early days. It's almost like it's -- in its infancy.

So I think we have to apply some strategic patience here and look at how this grows organically because it doesn't make sense to jump into -- at the upper end and the same dynamics that maybe is happening at the lower end. So it's early days. We're watching it and perhaps we're going to have to have some strategic patience.

[Steffen Hoffmann, Head of Investor Relations and Treasury]

Thank you, Ola. Thank you, Harald. And we switch to some of the colleagues on the telephone line. The next gentleman would be Jose Asumendi from JPMorgan. Jose, if you can hear us?

[Jose Asumendi, JPMorgan]

Jose from JPMorgan. Hi, Ola, congratulations on the year. Can you hear me?

[Steffen Hoffmann, Head of Investor Relations and Treasury]

Yes, we can hear you.

[Jose Asumendi, JPMorgan]

Perfect. Just a couple of questions, please. There's a bit of delay. So I'll just probably take both questions. When -- the first question for Harald, please.

Can you comment on the gross margin dilution on BEV versus ICE, if there is any within Mercedes-Benz. We are seeing some of the competitors disclosing a substantial gross margin dilution between vehicles and internal combustion engine. This topic is obviously going to accelerate in the coming quarters as other car companies disclose margins. I would love to understand, please, if there is any margin dilution for you on BEV versus ICE on gross margin. And if there is not any significant dilution, what are you doing better than the others?

Is it pricing power? Is it [indiscernible] scale, purchasing battery, et cetera?

And then second question, please, for Ola. But when I look at the margins, very strong performance. However, I would love to understand a bit better this medium-term margin ambition you have for Mercedes-Benz cars. Have margins peaked in 2022? What do you think are the levers to improve the profitability margins to higher levels in the next 2, 3 years?

And do you think we could be at least on our side underestimating the move from wholesale into retail?

[Harald Wilhelm, Chief Financial Officer]

Yes. Jose, thank you. So on the BEV margin, I would say you know that since quite a while, we take, I think, I mean, a cautious and a prudent view on it in terms of how do we judge, I mean, the mid- and the long-term outlook, I mean, on the BEV margins as the significant step-up in variable cost, I mean, from the e-drive train, I mean, particularly in the battery today is a fact and even more so if you look at the raw material prices.

So to talk about, I mean, cost parity or margin parity, sounds to me a bit too ambitious. So we take, I think, I mean, a more realistic stance in this respect. And that's why we address all of the other levers, I mean, to compensate, I mean, a margin dilution.

Where did we end up? I mean, in 2022, well, you don't see really traces. I think, I mean, the family, which is in the market, EQ family with the EQS, with the SUV EQS starting, the EQE sedan starting, but also even Mini QE and EQB are doing well in terms of the margin.

And now, I mean, we scale significantly, I mean, in 2023. We say approximately double the vehicles are there. And structurally, however, I mean, they sit below them in the respective eyes. And that's why in the guidance, I mean, for 2023, I said before, you have a slight dilution from this step-up, which we want to compensate by the Top-End share.

Maybe when I say slight, you could see that in the order of magnitude in terms of, I mean, 0.5% in terms of ROS dilution for 2023. Individual margins, I think, doesn't make a lot of sense now to talk about the individual margins of each and every vehicle as depending on when and how they scale. I mean this is changing. And -- but I mean, the one thing, I mean, I would say, even on the ones where you would expect a pretty poor margin at the lower end are doing fine, are doing okay. So the margins are not that far away from the respective ICE vehicles.

I'm referring to EQA and EQB, for example. And on the EQS, I mean you know that we took a very ambitious stance in terms of where to position in, and we'll definitely, I mean, keep the aspiration, I mean, to improve them in the margin. So I would say, for 2023, moderate to slight dilution. And for the other levers, I think that, Ola, refers to your second question.

[Ola Kallenius, Chief Executive Officer]

Just as a general statement, Jose. The so-called weather chart that Harald presented at the strategy update in May of last year, that stands. There, we outlined what our ambition is by the mid of the decade when we have progressed further into transformation. We haven't finished the transformation, but we have progressed further into transformation.

So that ambition under those different weather condition stands, which means we want to manage the transformation in a profitable manner. So I don't want to say anything that changes that today because that is our financial ambition. But you asked specifically about the dynamics of going into direct sales, and I've had the opportunity to talk to different markets on this here recently. A few weeks ago, I went to India, whereas it's not a very large market. It is a market in growth and an economy in growth.

And that was one of the overseas market that we turned into direct sales last year. And I had a meeting with the dealer board. And I think the best is actually to get direct feedback from the people that have switched their business model together with us and what do they say.

They were tremendously positive on what they had experienced on this shift. And I think there's one effect that we had calculated with. But as you said, Harald, maybe so far, that came out a little bit better than we had expected, is if a customer makes a decision that they want to buy a Mercedes, let's say you want to go out and buy an E-Class, at some point in that purchasing decision-making process, the customer has made up his or her mind.

Then usually, what happens is you either go to the dealer of choice, the one that you know and you trust and you make the transaction, or you start shopping around. And the shopping around in the one market area, maybe you go to a couple or 3 dealers. Inevitably, you would have a dynamic going on there.

Once you go to direct sales, and it is the manufacturer that sets the price, you move away from selling the price to just selling the product, which by the way, should be your focus anyway if you have a luxury ambition.

Not only does that take anxiety away from the transaction event and also gives the customer confidence that when they buy, they're not going to get a better deal next door, so to speak. So that dynamics generally in the market that we have had turnover so far has led to a higher customer satisfaction and more price stability. So yes, moving into direct sales is 1 of those levers to deal with the increase in variable costs driven by EV drive trains, which is what the margin story is all about on the EV side.

[Steffen Hoffmann, Head of Investor Relations and Treasury]

Thanks, Ola. Thanks, Harald. Thanks, Jose, for your questions. We stay virtually in London and continue with Daniel Roeska from Bernstein.

[Daniel Roeska, Bernstein]

It's Dan from Bernstein. Congrats on the strong Q4. Maybe a little bit more on the strategic timeframe on the upstream and downstream around the whole BEV transition. Could you talk about your goals for your upstream supply chain? Where are you seeing sufficient investments from suppliers and governments?

And where do you think you may still need to step in beyond what you had planned so far from raw mats, mining, refining, some manufacturing kind of, where do you perceive the speed to be the slowest right now? And thinking about the downstream kind of your sales, there have been plenty of studies asking consumers, 20% to 40% typically in the market are willing to buy an EV, but there are still holdouts. They are 20% to 40% who don't want to buy an EV yet.

And so in your view, what are the most important issues you need to tackle on, you need to convince kind of those holdouts in the next 7 years, kind of what are you focused on kind of bringing those last non-EV buyers into the fold?

[Ola Kallenius, Chief Executive Officer]

Yes, Daniel, if we start with the raw material picture, we are kind of mapped in a matrix, the whole world and all the relevant raw materials just to mention the main ones, lithium, nickel, cobalt and so on. And as you are aware, we have already struck some offtake agreements. We have also signed agreements to go all the way to the source into mining with Canada and refining in this case, in Europe. And we're working on other potential options to go into deep sourcing. But prior to that, and alongside with that, we're working with every one of our Tier 1s and looking at the sourcing chain completely, also region for region.

For instance, we announced at the beginning of last year that we will, by the middle of this decade, we will North American or -- Americanize our supply chain for battery cells in the United States for the mid of the decade. So we have sat down with that player and looked at where are the raw materials going to come from, where is the refining capacity and so on.

So this is a very large matrix where you try to kind of fill field after field from a question mark to an exclamation mark. If you ask me where is the strategic challenge for the overall raw material market of those? I think it is the pace of lithium extraction and refining. It's not the only challenge, but that is maybe the 1 that has the biggest ramp. Because if you put all the ambitions of all the car companies on top of each other, if you look at what the current level of production is, a lot needs to happen between now and the end of the decade and into the next decade.

So this is a dynamic and moving area, but where we are going beyond what we would traditionally do rely on the Tier 1s taking care of the problem. And last comment on that, as you all know, we took a stake in the aspiring European cell champion, ACC. So now we have a tremendous amount of visibility through being a partner in that venture of exactly what's going on in cell manufacturing on all levels, which indeed increases not only our visibility, but also our know-how on how to go after this. So the EV holdouts, we are all realistic about the transition that switching from high-tech combustion to all EV is a project that is going to go on throughout this decade and next decade. We have an ambition to try to go faster into it and convince the customers at the upper end of the market, then specifically the Mercedes customers, to go in faster.

And I think many things are happening and need to happen.

On the one side -- on the product side, it will get more and more attractive. I briefly alluded to the fact that some of the technologies that we developed for the EQXX Research Car, I mean, in 2 or 3 years, you will already see some of these things in the market. What does that mean? Better efficiencies, better economy for the customer, better range, is that less range anxiety, faster ability to charge, and you combine that with the proliferation of the charging infrastructure that we are contributing to ourselves as well. Those would add both economic and convenience arguments along the way.

I'm not going to pretend that the full transfer to a full electric future is a walk in the park. It's a very, very big job for any company and for the industry. But I can commit to that we, as Mercedes-Benz, we are going to invest massively on making that journey for our customers increasingly more attractive. And then we will see when the last holdout jumps, it will be as far as we are concerned, some time in the '30s, closer to the beginning than the end.

[Daniel Roeska, Bernstein]

Maybe if I could follow up on your first answer a little bit. Do you have a sense what the critical path is kind of to get the upstream supply chain into shape basically? When is it kind of -- when is the last critical point when you could step in with investments or do something else, kind of how much time do your suppliers and the supply chain have to demonstrate that they can get to the higher lithium capacity that like '25? Or is it more '28, '29 on the critical path?

[Ola Kallenius, Chief Executive Officer]

I think it's impossible at this stage to pinpoint that exactly the market is too heterogeneous and not transparent enough to even be able to judge this plus nobody knows exactly how quick is the adoption rate going to be. So there are so many factors that would factor into that. You can't pinpoint it.

The only thing you can do in a situation like this is to get going and start moving, and that's what we're doing.

[Steffen Hoffmann, Head of Investor Relations and Treasury]

Thanks, Ola. Thanks, Daniel. And the next gentleman in line is George Galliers from Goldman Sachs.

[George Galliers, Goldman Sachs]

The first question is on the optionality, Harald, that you have exercised. I'm sure many investors will be very happy to see you initiate a buyback program. And together with the dividend, it does amount to a sizable shareholder return.

The 40% dividend payout ratio has been a consistent staple of Mercedes' capital allocation framework for many years. Is it fair that investors should now also consider a buyback as an ongoing pillar of your capital allocation framework? And then the second question I had was just around mobility.

You're targeting a 12% to 14% return on equity, or 13% to 15% before the charging costs for this year, which is obviously some way below the 2021, 2022 run rate. You mentioned higher interest rates playing a part, which presumably you could try and pass through to your customers decreasing the affordability of the cars and therefore potentially increasing the need for incentives or which the industrial business could subvent to support the customer. So the correct -- so the question really is, is it fair to say your absolute priority is the pricing on new cars to the customers and the continued success of the top-end luxury vehicle sales? And if that means that the financial services ROE slips into the targeted 13% to 15% range pre-charging from today's levels, you are happy for that evolution and disciplined and stronger pricing on the new cars is the absolute #1 priority?

[Harald Wilhelm, Chief Financial Officer]

Yes. Thanks, George. Well, I see you guys. You move from optionality to reality, and you continue to grab. Well, what's the message here? I think the €4 billion over the 2 years, I mean, to come, definitely, we want to do that. We said we want to do that maximum within 24 months. So let's see, I mean, the speed of execution.

We also said we want to fund that from the cash flow to be generated after application of the divi in '23 and then in 2024. And I think, Ola, as we stand here, we have, I think, any intention to continue doing so even beyond 2024. But then I would say, let's do '23, '24 in terms of strategy execution, in terms of margin, in terms of cash generation, in terms of implementation of the €4 billion, and then we have ample of time, I mean, to see where we're going. Anything beyond that does not make too much sense at this stage.

Second question on mobility. I think you heard, I mean, what I explained in terms of the margin guidance for 2023. If you take the underlying 13% to 15%, I think that sits within the mid- to long-term corridor where we think, I mean, mobility should be in terms of return on equity. I mean, we're driving that business at a 9% to 10%, I mean, equity ratio. I think that sits above our cost of capital.

But at the end, I mean, frankly, this is one company, cars and mobility. And I mean, we joined forces to be successful, I mean, in the market. So there's no point in, so to say, on the one side, I mean, subsidizing the industrial side, the cars or the van side and plummeting them in the mobility return or on the other side, doing the opposite. Now we're doing that. I mean, as one team.

And at this stage, when we talked about, I mean, the lower interest rate margin, that has really been a function of the transition phase in some of the markets. You cannot right away, I mean, pass further on the higher level of interest, I mean, to the customers. There's a time delay, I mean, in between, namely in Germany.

But there's also a main competitive environment. And that's why I think, I mean, we cater for that. But ambitioning for this kind of underlying 13% to 15%, we feel comfortable about that in terms of where it stands. But again, at the end, both work hand-in-hand to be most successful in the market space.

[Steffen Hoffmann, Head of Investor Relations and Treasury]

Thanks, Harald. Thanks, George. And we continue with Horst Schneider from Bank of America.

[Horst Schneider, Bank of America]

It's Horst Schneider from Bank of America. The first one is for Harald, please. It would be great if you could maybe share some more details on industrial performance for 2023. So maybe you can share some details what exactly you expect just in terms of range for the raw material price burden, wage cost increases, supplier pass-through. I think that all falls into the industrial performance bracket.

Then #2 is maybe more for Ola. When you say you want to double your EV sales in 2023, maybe you can provide some more details how you want to achieve that. So in which region, particularly, you want to grow? I know you launched a lot of EVs, probably growth comes from the new models as well. But is it just from the new models or you also expect increases from the EQA, EQB environment, but not any easier with the Tesla price cuts.

So maybe that affects particular EQA, EQB as well. So therefore, the question is also how you expect EV pricing to develop in the end? And is there a trade-off between volume and EV pricing in the end for 2023?

[Harald Wilhelm, Chief Financial Officer]

So on the first one, Horst, on the industrial performance side 2023. Well, you might see some relief on the raw material side. I mean, if I think about steel, for example. But then at the same time, on battery materials, I mean, lithium, obviously, they are still at a very elevated level. And as the share goes up on the BEV side, I mean, that obviously causes a headwind.

What else? We do anticipate commodity one-timer, one-time charges, I mean, in 2023 to continue also at an elevated level and also inflation hitting, I mean, the commodity bill, so to say, also I mean, the second tranche of this inflation compensation, I mean, in Germany, the €3,000 per employee, just to name a few.

So all in all, still, I mean, a significant headwind on the industrial side, less than from today's perspective, I mean, less than in the bridge in '21 to '22, but still, I mean, material.

[Ola Kallenius, Chief Executive Officer]

To your second question, Horst, if you see how our EV portfolio is developing and you look at from now to the midterm into the mid of the decade, what will carry us over the next couple or 3 years are the vehicles that we have now. On the one hand, as you mentioned, the EQA and EQB and also the 4 family members of the EQA, EQS family. That is what carries us for the next couple of 3 years. The second wave that comes beyond that is then the MMA architecture and the MBEA architecture, where we have a whole host of products that are both in Core and in the Entry segments. So specifically for the year 2023, it's a bit of both of what you mentioned.

Yes, we have very good momentum on the EQA and EQB, especially in Europe. But we have launched EQB in the United States. So that's just kind of started. As I mentioned, in China, we're looking at how the market develops. It makes no sense to fire sale vehicles into that market, but then maybe to have a little bit more patience than that.

So a combination of this availability I'm looking at the EQS here on stage, the smaller [indiscernible] to that EQE-SUV comes in the second quarter of this year, received very good feedback from that. It will be a good vehicle for The United States, but also for Europe and also for China.

So it's a combination of these things, and that's why we feel that in this current market, even though we're guiding volume staying around the same level as next year that our BEV side of the business has a good opportunity to grow by 100% this year.

[Horst Schneider, Bank of America]

Just a small follow-up. Ola, you expect to benefit from the inflation reduction in the U.S. or it's a nonevent for you in 2023? Or maybe both?

[Ola Kallenius, Chief Executive Officer]

Because the Inflation Reduction Act does provide a policy for leasing, yes, that applies to our vehicles as well in the United States. So that is a net benefit to the customer and will lead to some impetus in the market there for us as well.

[Steffen Hoffmann, Head of Investor Relations and Treasury]

Thanks, Horst. And we continue with Dorothee Cresswell from Exane.

[Dorothee Cresswell, Exane]

It's Dorothee Cresswell from Exane. I only have 1 left, which is around residual. So we've obviously seen new car pricing peak. And I just wondered whether you could give us some more color on the size of the headwind that you're anticipating from lower off-lease asset disposal profits in 2023. I think you said that was reflected in your guidance.

I just like to understand how big that is?

[Harald Wilhelm, Chief Financial Officer]

Yes. Thanks, Dorothee. Well, I mean, do we really see material drift to move? I mean, right now, not so much. I know we have been talking about that, I mean, again and again, and then it didn't happen.

So I'm not standing here and say cry wolf. But I think, I mean, probably in the context of the overall macro situation, it is, I mean, prudent to include a bit of a softening here, which would mean it still remains very positive, but then would lead, I mean, to a less positive contribution in 2023 compared to 2021.

Well, as a rule of summer, I would say maybe it's a -- I mean in this guidance we gave today roughly, I mean, 0.5% in terms of ROS impact headwind dilution, which we included at this juncture. But again, this is not based on the scientific data point. This is more, I mean, a risk protection from current perspective.

[Steffen Hoffmann, Head of Investor Relations and Treasury]

Thanks, Dorothee, for your question. And we continue with Daniel Schwartz from Stifel.

[Daniel Schwarz]

Yes. Actually, I had 2. 1 is on the EBIT margin outlook. Last year, you included a 2 percentage point buffer for [indiscernible]. This year it's 1 percentage point.

Is that an expression that risk generally see lower or your visibility is better compared to last year? And the second question would be on the share buyback. The [indiscernible] says that Geely and BAIC remain below 10%. Can you maybe say why that is? Was it important to you?

Or is there a regulatory reason that they cannot exceed the 10%?

[Harald Wilhelm, Chief Financial Officer]

So well, there is no signs as well between 2% last year and 1% by now. No, I think, I mean, based on what we could achieve in 2022, managing so that situation on the pricing, on the commodity side, on the other side, some of the raw mats, I mean, I mentioned steel going right direction. Maybe, therefore, I mean, we do believe that operating, so to say, with this 1% macro contingency at this stage is the right thing, I mean, to do.

Obviously, we'll monitor very closely the evolution in all of the levers. I mean, throughout the year, but probably, I mean, having a too wide of a range you wouldn't appreciate either having gone through the experiences quarter-by-quarter [indiscernible] in the last year.

On the second point, I think -- we very much, I think, I mean, enjoy and appreciate the partnership with each of them with BAIC and with Geely with a different focus and therefore, having that kind of strong support. This is, I think, what you can read from this agreement to stay below 10%. That means the share buyback action is strongly supported by each of them, respectively, BAIC, I mean and Geely. So I think it's an endorsement, I mean, of the partnership, which we're having, not just on the shareholding side, but also, I mean, on the business, on the strategy side of things.

And on the other side, keeping me in the shareholding below 10% in the current geo context, I think, is also an important thing. And needless to say that there is no pooling, i.e., you should definitely read the shareholding separate, i.e., there's a BAIC shareholding and there's a Geely shareholding and not read that as a combined shareholding.

So I think we're happy. We're very pleased and grateful and thankful for the support from both of these to agree with us, so I mean on short notice ahead of the announcement. Again, that endorses, I think, a great partnership.

[Steffen Hoffmann, Head of Investor Relations and Treasury]

Thanks, Daniel. Thanks, Harald. If there is further question in the room, please give me a sign. I'll take the next 1 on the phone, and then we go back to the room. Next colleague in line would be Tom Narayan from RBC.

[Tom Narayan, RBC]

Can you hear me?

[Steffen Hoffmann, Head of Investor Relations and Treasury]

Yes. Very well. Loud and clear.

[Tom Narayan, RBC]

Looking forward to next week's event, I will be there. So I have 2 questions. Another fun 1 on pricing. So Ford noted at their results call the difference between pricing in the U.S. and in Europe, they had said that incentives are already very high in Europe, unlike in the U.S.

And there's also obviously corporate car fleet in Europe, higher BEV sales, premium exposure is higher. So just wonder, you're obviously in both markets, but if you are seeing a kind of a difference in the dynamics of pricing in Europe versus the U.S.? And then my second question is, I mean, I don't know if you can give an exact number. But any color on the net savings per car of going direct to consumer, and maybe on top of that, any commentary on the dynamics in the U.S. of going direct to consumer, given the dealership dynamics there.

[Ola Kallenius, Chief Executive Officer]

So maybe I'll start and feel free to jump in, Harald. Whereas we don't obviously disclose our special discounts for different regions, what you mentioned due to a higher level of fleet sales in Europe generally for many, many, many years, the incentive levels in Europe have -- sat above the United States traditionally.

I don't want to comment on what any other carmaker says, but that is generally true. But it's baked into the overall model of managing this. In terms of how the markets look, and I think Harald mentioned it before is that the economy has been remarkably resilient in the United States.

But I do read the press, and I do listen to the Fed that they are very determined on getting inflation under control and will continue to increase interest rates and so on and so forth. So there's a purpose behind that, that we need to watch. But that is as far as special discount management is concerned.

For direct sales. Also, we don't disclose what the net benefit of it is in terms of economically for our whole model. But it is a net benefit. And especially this issue next to -- there's a cost savings benefit as well. It's not just about the market dynamics and intra-brand competition and so on.

It's both. And I can only reiterate that on that side of it, we have so far been slightly positively surprised by how it has developed. United States is a different animal. With the franchise model in the United States, we are not pursuing direct sales in the United States, but are working with our very strong partners to develop our position in the U.S. market.

What we did do, though, and I think we were one of the first OEMs, maybe the first OEM. We have signed an agreement with our dealers with regard to over-the-air updates and how that is going to be handled in the United States, which is very, very important. Because you would not want to have the inconvenience of a customer that can buy something over the air having to then drive to a physical location to get that over-the-air update.

I mean, it defeats the whole purpose of the technology if you would have to do that. So I'm happy that we could find a balanced agreement with our dealers that both parties profit from over-the-air in the United States. And even though I realize that this is a small number now in terms of the revenue, and we will talk more about it next week, this is a number that can grow.

So in that regard, we will be able to sell directly over there to the customers, but in partnership with our dealers in the United States.

[Steffen Hoffmann, Head of Investor Relations and Treasury]

Thanks, Ola. Thanks, Tom. And the next gentleman would be in the room, Frank Biller from LBBW.

[Frank Biller, LBBW]

Yes. There's a question about the legal proceedings. In the last quarter, there was a positive for more than €300 million. Maybe you can explain a bit what changed here to the positive and what is that going on in 2023?

[Harald Wilhelm, Chief Financial Officer]

Yes. I mean, within that, well spotted was in the Q4. I mean, obviously, as each and every closing, we do a renewed assessment of all of these proceedings. And that one, I mean, caused, some release of the positioning, but also, I mean, technical evolution in terms of the FX evolution, which is also being recorded in there. So that is basically explaining the evolution.

[Steffen Hoffmann, Head of Investor Relations and Treasury]

Thank you, Harald. I go back to the telephone to Philippe Houchois from Jefferies.

[Philippe Houchois, Jefferies]

Sorry to go back to this direct selling. But 1 question I have is we've seen what Tesla has done recently in terms of pricing. And by the way, I'm more interested in is kind of the transparency of what is happening in the direct selling business or the agency business model. I mean, right now, the industry works more in an opaque manner between customer and the dealer and the dealer and the OEM and the risk in more direct selling approaches is we get much more transparency, much more dynamic pricing and a bit of a yo-yo on the pricing.

And I'm just wondering how that -- what it means for your brand. Tesla is not a luxury brand. It's barely maybe not a premium brand over time, but you are moving in a different direction. So how does this visibility, transparency, or volatility in pricing impact the brand potentially negatively? And also if there's a big variance, how that would potentially affect result or your assumptions that you built into your business model?

And then another question maybe more for Harald is from a modeling standpoint, and you pointed out, you're moving from being a wholesale business more to a more retail business model. That means you take on more risk on inventory, finished and work in progress. But you also drop a lot of the dealer receivables on your captive finance balance sheet.

And I'm just wondering from a consolidated business standpoint, are we going to have -- is it going to be more capital intensive to be doing direct selling rather than 1 -- more capital tied up on the industrial balance sheet, maybe through inventory and less -- much less tied up in the captive finance balance sheet?

[Ola Kallenius, Chief Executive Officer]

On your first question, I want to go back to the feedback that we have received so far from the markets that we have turned. It's actually raised the comfort level with most customers that they are getting a fair deal. Yes, when you go into direct sales, you can have movements and you would love to make those decisions as you go along and how the market moves.

Ideally, you should try to prevent it from swinging too much in a too short period of time, of course. But there, I come back to this homework #1, managing the operating point. As I said, it is a craft. It's not something that is done without experience and sophistication. So yes, there would be more transparency on that, and you will have to try to manage those swings as best you can and try to not make it erratic.

But I want to underline that in the first market, we turned 3 years ago, South Africa and Sweden. So we have now some experience with this over the last couple or 3 years. And in those markets, that has worked quite well. Now we're getting into some big markets here with the U.K. and Germany this year.

So we're excited about how that's going to develop.

[Harald Wilhelm, Chief Financial Officer]

And Philippe, on the modeling. On a nominal basis, yes, you are right. I mean, switching into the model D basically means that the retail stock comes on our balance sheet. But when we have a different approach or an ambition of it, namely having much more direct, I mean, interaction visibility, I mean, with customer allow us to optimize also the inventory end-to-end from the ordering down into the factory and improve, therefore, the flow of the outbound. So -- and therefore, I think there is definitely, I mean, a potential to not only add up, I mean, the inventory coming from the dealer, but having a consolidated view of an inventory in dealer, which is less than 1 plus 1.

You might see in the guidance for 2023, when we say we have a cash conversion of 0.8 to 1, well, I mean, U.K., as Ola said, I mean, is already online. And Germany is coming online this year with a very important size of the market. So we do believe and can absorb that overall, but also within, I mean, the inventory envelope we want to do at large.

On the financing side, well, I think, I mean, mobility already serves dealer financing. But also, I mean, direct customer financing today. So we could say, I mean, to some extent, wholesale financing falls apart and another share comes on board, I do not expect any material shift in the size of the exposure on the mobility side nor in the credit quality, if I may say. As again, we are in it already today. And I think the credit quality, but also, I mean, the risk management allows us, I think, to run that exposure.

I said it earlier today with net credit losses at a very, very moderate level. And I do expect that, that is not going to change as a function of the switch over of the model.

[Ola Kallenius, Chief Executive Officer]

I would like to underline one thing that Harald said on the management of the inventory. If you put it in a spreadsheet, it's not like you're not paying for the retail inventory today, you're paying it through the dealer margin. So in a more optimized model that Harald described, actually old wholesale stock plus now new retail stock if that can be optimized better in the market, actually 1 plus 1 becomes less than 2.

So the economic burden of the whole system of such a model is less burdensome and more economical than the model that we have today. That is 1 part of the cost savings of going into direct sales.

[Harald Wilhelm, Chief Financial Officer]

And as you said before, I mean, the intra-brand competition, well, I mean, the dealer A, has the vehicles on stock, right? And the dealer B has a vehicle on stock. In the future, you don't need, I mean, the vehicles of dealer A and B. You only have 1 set. So the elimination of the intra-brand is also an enabler to lower inventory.

[Steffen Hoffmann, Head of Investor Relations and Treasury]

And now I welcome Martin Wilkie from Citi in the line.

[Martin Wilkie, Citi]

It's Martin from Citi. Just 1 question to come back. You touched on the Inflation Reduction Act in the U.S. a couple of times. Obviously, there's a lot of talk in Europe about what might happen here and potentially some decisions towards the end of March.

Are Brussels approaching you as to what you'd like to recommend as an industry, as to what Europe should do to respond. And certainly, what you would like to see as a company? And obviously, there are incentives for electric vehicles in many countries in the EU already, but is it more to do with the security of supply of critical components and so forth? Just how you might like to see that develop in Europe?

[Ola Kallenius, Chief Executive Officer]

In the dialogues that we have with political leaders in Berlin and in Brussels, whereas we support the underlying notion of pushing ourselves faster into a decarbonized future, I mean, it's 1 of the foundations of our whole strategy. And should Europe be willing or able to do more in this regard beyond what they have done with [indiscernible] and so on, of course, that would be a positive thing. So we would be for that with a but, without adding a protectionistic angle to it.

We try to remind, and I think at least Berlin is very aware of this, the biggest exporters from the United States back to Europe are German companies. And we are one of those German companies. So supporting, I don't know, investments and other things to make it -- make the transition more economical, faster, good trade barriers, please know.

[Steffen Hoffmann, Head of Investor Relations and Treasury]

Clear statement, Ola. Thank you very much. And we continue on the line with Stephen Reitman from Societe Generale.

[Stephen Reitman, Societe Generale]

I have a couple of questions, please. Just some clarification. You mentioned that you're planning to double your BEV sales this year. I was just wanted to be clear on what basis we're talking about. Is it on the retail figures that you described?

So the 118,000 roughly that you sold in 2022, double that? Or you're looking at the wholesale figure that I'm looking at in Slide #20 of the fact book where you're showing wholesales, which I guess includes small [indiscernible] of 150,000 units.

Second question, could you comment on PHEVs and with the bullish [indiscernible] consumer-facing eco-bonus in Germany, what the reaction have you seen to demand for PHEVs in Germany and other markets as well?

[Ola Kallenius, Chief Executive Officer]

So to be very specific, and this was 1 of the conversations that we had before this meeting. We always state our wholesale numbers to avoid confusion. So when I say double, I'm talking about the Mercedes-Benz branded vehicles wholesale. That's what I'm talking about.

Smart. As you know, some of it sits in the production that we still have in Hamburg of the [4.2], which is continuing throughout 2023 and into 2024. That, we will not double. I think that will probably sit around the same level or something like that.

In the joint venture that we have with Geely, we're just about to launch or we're in launch right now of the first product called the Smart #One. Great product city -- small city SUV. That product is going from 0 to many, many thousands. But they need to talk about that joint venture separately. You need to talk about that.

So it's not meaningful when you had 0 before to talk about the percentage on that side. So that's it.

PHEVs, you could see that we went from '21 to '22 on a relatively stable level. We have, indeed, though, introduced more and more of the new plug-in hybrids in the new cars that are coming into the market that on a WLTP basis have around 100 kilometers range. And we can see that a lot of customers that like this best of both world's proposition, they really love that. You can kind of -- can be electric from Monday through Friday. But if you have longer trip ambitions, you still have the combustion engines.

Yes, Germany has changed their incentivization, but it's a super heterogeneous picture around the world here and around Europe.

So the plug-in hybrids will remain very relevant also in the next few years.

[Steffen Hoffmann, Head of Investor Relations and Treasury]

Thank you very much. We have time for a last question out of the room, Patrick Hummel.

[Patrick Hummel, UBS]

Just a high-level question in terms of how you approach product innovation. Where does Mercedes nowadays stand between the traditional 7-year product life cycle and the MOP, as you like to call it, in the past at least, mid-of-life cycle versus the constant rapid innovation model that some of the new players maintained with much shorter product life cycles. Innovations on the fly that are more than just small design refreshes. I'm thinking EQA, EQB. In a couple of years from now, they will probably look pretty dated against the MMA vehicle.

And the same might happen to EVA 2 vehicles when MBA is ready and the AMG version. So how do you think about the innovation on existing products? Do you have to set more CapEx or R&D aside for keeping these products fresh than was the case in the past? How is that baked into your investment budget?

[Ola Kallenius, Chief Executive Officer]

On the digital side for all vehicles and, of course, accelerated as we then go into the MBOS era, it becomes a constant flow. It is like this river. You just add water to it, and there's no beginning and no end. So yes, on the digital side, we're already moving into that direction, and we will accelerate the pace on that direction on all of our vehicles, not just the battery electric ones.

With regard to the electric drivetrain, and maybe some other features as well, especially for the battery electric vehicles, it's not like you now do a fire and forget, you put this beautiful EQS into the market and you say that's it, let's wake up in 4 years' time or in 7 years' time and see what's going on. That's not going to work. So you can expect us to also, during the life cycle of a vehicle, do things that maybe we didn't do in the past.

[Steffen Hoffmann, Head of Investor Relations and Treasury]

Thank you very much for this lively quick Q&A. Thanks a lot for your participation. Thank you very much, Ola and Harald for your answers. As always, from an IR perspective, we are at your disposal afterwards. For the ones who want to follow the media Q&A, this will start in approximately 15 minutes.

To all of you once again, have a great morning, great afternoon, great evening. Look forward to talking to you soon. Look forward to seeing some of you next week in California. Thank you very much, and goodbye.